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Malaysia: Penalty for failure to furnish transfer pricing documentation

By and 4 Mins Read

In brief

The Malaysian Finance Act 2020 introduced, among others, several legislative changes to the Malaysian Income Tax Act 1967 (ITA) in respect of transfer pricing. Notably, a penalty provision was introduced. Effective 1 January 2021, taxpayers (where applicable) who fail to furnish transfer pricing documentation (TPD) upon the Malaysian Inland Revenue Board’s (MIRB’s) request will be subject to a fine ranging from RM 20,000 to RM 100,000 and / or imprisonment.

Consistent with this, the MIRB has also revised the Transfer Pricing Guidelines 2012 to reduce the time given to taxpayers to furnish their TPD from 30 days to 14 days.

Contents

  1. Key takeaways
  2. In more detail
  3. Introduction of the TPD Penalty
  4. How can we can help

Key takeaways

The introduction of this penalty provision brings to light stricter enforcement measures adopted by the MIRB against the backdrop of increasing tax and transfer pricing audit activity. In view of the short time frame of 14 days to furnish TPD, taxpayers now need to be aware that time is of the essence in preparing contemporaneous TPD.

For companies that currently already have TPD, it may be prudent to review them to ensure that they are aligned with the MIRB’s requirements and that their transfer pricing policies are defensible in the event of an audit.

In more detail

Recent transfer pricing-related amendments made to the ITA

Among the amendments affecting the Malaysian transfer pricing regime from 1 January 2021 onwards are the following:

  • Introduction of a penalty for the failure to furnish TPD upon the MIRB’s request (section 113B of the ITA) (“TPD Penalty“). This amendment will be elaborated in the next section.
  • Introduction of a provision which allows the Director General of Inland Revenue (DGIR) to impose a surcharge not exceeding 5% on any transfer pricing adjustment made, regardless of whether the adjustment resulted in any additional tax payable (section 140A(3C) of the ITA).
  • Insertion of provisions legislating the existing authority for the DGIR to disregard and make adjustments to any structure adopted in a controlled transaction so the transaction may be carried out at arm’s length, having regard to economic and commercial reality (sections 140A(3A) and 140A(3B) of the ITA).

Introduction of the TPD Penalty

While taxpayers are not required to file their TPD along with their annual income tax returns, taxpayers have to furnish their TPD for any year of assessment upon the MIRB’s request. With the introduction of the TPD Penalty, any taxpayer who fails to furnish their TPD to the MIRB within the stipulated time frame may be liable to a fine ranging from RM 20,000 to RM 100,000 and/or imprisonment not exceeding six months.

The applicable time frames to submit the TPD requested is currently as follows:

For transfer pricing audit cases which have commenced before 1 January 2021 Within 30 days from the date of the MIRB’s written notice of request
For transfer pricing audit cases which have commenced on or after 1 January 2021 Within 14 days from the date of the MIRB’s written notice of request

 

In short, the introduction of the TPD Penalty is particularly significant as it provides the MIRB with the power to penalise a taxpayer without having to undergo the whole audit process, given that the taxpayer may be penalised solely for not being able to furnish TPD for the relevant year of assessment in time.

How can we can help

With the introduction of the penalty for failure to furnish TPD as well as the power to impose a surcharge on any transfer pricing adjustment made, taxpayers may expect increased transfer pricing audit activity and intensified scrutiny on intercompany transactions.

In this regard, businesses without TPD may wish to consider if their intercompany transactions warrant TPD. Companies with existing transfer pricing policies and documentation should ensure that they are sufficiently robust to withstand audit and scrutiny.

We have a multi-faceted and multi-disciplinary team of transfer pricing practitioners who are economists and tax lawyers who are able to provide strategic advice and assistance in respect of the following:

  • Transfer Pricing Planning – we are well positioned to support you in developing a sustainable planning approach;
  • TPD Preparation and Defence – we are capable ot assisting you with the requisite TPD that is compliant and defensible; and;
  • Transfer Pricing Audit Support – in times of audit, we are well placed to support you and your team.

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Author

Adeline Wong heads the Tax Practice Group of Wong & Partners. She has more than 25 years of experience in the area of corporate tax planning, advisory, audit and investigation work. She has presented in both domestic and international tax conferences, including conferences organised by the Tax Executive Institute in the US, Society of Trust and Estate Practitioners in Singapore and more recently, Bloomberg BNA's Global Transfer Pricing Conference in Shanghai. She is also a regular contributor to established publications on tax-related legislation and developments in Malaysia, such as Bloomberg BNA and the International Bureau of Fiscal Documentation.

Author

Krystal Ng is a partner in the Tax, Trade and Wealth Management Practice Group of Wong & Partners with over 10 years of experience. Her primary focus is on tax and transfer pricing issues in the context of crossborder transactions as well as post-mergers and acquisitions integration for multinational clients in a wide range of industries.
She has been recognised as a Next Generation Partner by Legal 500 Asia Pacific 2023, and is named as Up and Coming for Tax in Chambers Asia Pacific 2023. In the Chambers guide, clients commend her for being "a very responsive and knowledgeable tax consultant." She was also awarded the Tax Rising Star award by Euromoney Women in Business Law Awards Asia Pacific 2022.
Krystal's practice extends to the provision of strategic tax advice on a broad range of subjects such as income tax, double tax treaties, withholding tax, real property gains tax, assisting with tax incentives and exemptions as well as the planning and management of transfer pricing considerations to achieve an optimal and more tax effective model on a domestic, regional or global level.
She is regularly called upon by clients to advise on international and domestic tax planning matters concerning in-bound investments to achieve an optimal and effective business model, tax structuring and integrations postmerger and acquisitions as well as negotiating tax incentive applications for foreign investments into Malaysia.

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